Countdown to Making America Great Again: How Will the Markets React to Donald Trump’s Inauguration?

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Responsible for the management & development of the easyMarkets client base as well the development of our IB partner program.

On November 8, Donald Trump shocked the world by winning the US presidency in convincing fashion. After initial hesitation, global stocks surged on hopes that the incoming Republican administration may stimulate economic growth and profitability in the world’s largest economy.

Nowhere was this more evident than on Wall Street. In the weeks following Trump’s election, the S&P 500 Index, Dow Jones Industrial Average and Nasdaq Composite Index soared to multiple record highs, with virtually every sector recording strong gains. As traders bought into the Trump rally, volatility plunged to its lowest level since the summer.

Trump’s election also had a positive impact on the US dollar, which soared to fresh 14-year highs against a basket of other major currencies. The greenback padded its gains after the Federal Reserve raised interest rates in December and signaled a faster pace of tightening over the next two years.

Gains slowed at the end of December amid seasonally low trading volumes. Other traders put on the brakes to gain further clarity about Trump’s proposed policies and how they will play out in the financial markets. Among other things, the incoming president has promised to spend trillions on infrastructure and introduce massive corporate tax cuts.

Trump’s inauguration is scheduled on January 20, 2017, and the markets may be buzzing with speculation about the new administration’s first 100 days in office. The performance of equities, bonds and currencies may be impacted by the mood on Wall Street and in the global market. Given the latest bull market run, expectations may not change very much over the next three weeks.

The outlook on global finance will become clearer as Trump begins to address several controversial issues that may dictate the success of his presidency. Below are five key issues that may influence the market’s perception of the incoming president during his first 100 days in office.[1]

Trump’s Cabinet

Trump’s cabinet includes several outsiders, but also many established Republican politicians that have raised criticisms about the direction of the new administration. As the ducks line up, traders may be better able to assess the likelihood that Trump may be able to pass some of his more controversial campaign promises. In other words, does Trump really signal major change or a continuation of establishment politics? Some of the answers may lie in his cabinet selection.

US-Russia Relations

Trump made it abundantly clear on the campaign trail that he intends to work with Russia on various geopolitical issues. Amid widespread allegations that Russia hacked the US presidential race, Trump’s approach to the Kremlin may have profound economic and geopolitical ramifications.

Repealing ObamaCare

Trump’s position on the Affordable Care Act (ObamaCare) during the campaign was clear: once in office, he will repeal it. His attitude appears to have shifted since the November 8 election. Repealing ObamaCare in whole or in part will have a direct impact on the nation’s healthcare sector. This is one segment of the stock market that has still experienced volatility since the election. According to analysts, Trump’s administration probably won’t repeal ObamaCare, but instead roll back the program under reconciliation.[2]

Infrastructure Spending

Trump made massive infrastructure spending the cornerstone of his campaign. This has been apparent on Wall Street, with sectors tied to raw materials and infrastructure experiencing large gains since November 8. The GOP’s stimulus program remains vague and will require concrete timelines and instructions to keep investors optimistic about the prospect of massive fiscal spending.

Tax Reform

Part of Trump’s promise to “make America great again” entails massive tax reform at the corporate and personal income levels. Many critics have argued that the proposed reforms would reduce federal taxes by up to $5.9 trillion[3] and possibly raise the national debt.[4] While Trump’s plan could lure many offshore American companies back home, it still has a lot of explaining to do, including how the administration plans to make up for the massive revenue gap.

These are just some of the pressing issues the Trump administration must address during its first 100 days in office. The answers will either keep stock markets red hot or trigger a sharp pullback in the event investors realize that the campaign promises aren’t lining up to reality.

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